Finding hot stocks to buy is not as hard as it sounds. The hard part is figuring out which ones will remain hot.
Companies like Amazon, Alphabet, Facebook, and Alibaba are among the largest in the world.
They were all founded in the mid to late 1990s except for Facebook which started in 2004. Incredible when you consider that The New York Stock Exchange is over 200 years old.
Technology is now a key driver in the economy.
Chew on this…
The Walt Disney Company has been in business since 1923; however, Netflix was able to surpass them in market cap, despite Disney having a more than 70-year head-start.
Just keep in mind, the hot stocks to buy now might not be the hot stocks to buy a decade from now. Companies like General Electric, AIG, and Eastman Kodak were all part of the Dow Jones Averages at one point.
Finding Hot Stocks To Buy – Day Trading
Day traders need volatility to make quick money from the markets. Figuring out what to trade often happens during the pre-market. Traders will look at which stocks are moving the most and see if there are any possible trades out there.
You can find this information on most trading platforms. As well as, websites like finviz.com and nasdaq.com.
Generally, most stocks don’t trade before the market opens at 9:30 AM ET unless it has a catalyst.
If you look above, you’ll see that Dave & Buster’s (NASD: PLAY) was trading 4.3% higher in the pre-market. The catalyst was a quarterly earnings release that it disclosed earlier that morning.
A catalyst can be an earnings release, analyst action (buy/sell recommendation), press release, rumors, news about the company or something that can materially affect its business.
Here are some recent catalysts and its impact on its stock price:
Tesla (NASD: TSLA)
On September 6, Tesla Ceo Elon Musk does a podcast interview with Joe Rogan. During the meeting, the two appear to pass along and puff on a cigar mixed with marijuana and tobacco.
The following morning Tesla shares fell sharply lower. As you can see, this is an example of a negative catalyst.
Canopy Growth Corporation (NYSE: CGC)
On August 15, 2018, Constellation Brands, maker of Corona beer, announced it was investing $4B into pot stock Canopy Growth Corporation.
When a large corporation expresses so much interest in a relatively young and unproven company, it’s generally viewed as a positive catalyst.
That said, the day of the announcement, Canopy saw its stock rise by more than 30% from the previous day close.
Websites like finviz, yahoo finance, and Twitter are excellent resources when searching for stock news.
The Story Matters When You’re Looking For Hot Stocks To Buy
A juicy story will always trump fundamentals in the short-term. Constellation’s investment into Canopy strengthed the narrative. Many traders were speculating on cannabis stocks well before Constellation’s investment announcement; however, what it did was legitimize the industry.
Marijuana is illegal in the United States on the federal level. That said, many investors have been reluctant to invest in the space because of the federal law.
Constellation’s move took some fear away from investors, and it caused other stocks in the sector to rise as well.
The most famous being Tilray (NASD: TLRY), a recent IPO that went from $17 to $300 in about two months.
Its catalysts included:
- A strong earnings report
- One of only a handful of pot stocks that trade on the Nasdaq or NYSE
- Canada set to legalize recreational marijuana later in the year
- A vast majority of the shares were borrowed and shorted, causing the stock to be placed on the REG SHO threshold security list.
Did it make sense that Tilray was trading by nearly 700 times its sales with a market cap of more than $20B?
Not really… but the market doesn’t care.
Psychology plays a significant role when trading hot stocks. Emotions like fear and greed take over, and fundamentals get thrown out the window.
Tilray eventually dropped by more than 50%, two days after it hit $300 per share.
Hot Stocks To Buy – Have An Exit Plan
Tilray’s short-term move was based on a supply and demand factor. Too many traders were short the stock causing it to squeeze higher.
Shifts in supply and demand can cause stocks to do crazy things. For example, in October of 2008, a massive short squeeze caused Volkswagen’s stock to rise by more than 150% in one day, making it one of the largest companies in the world.
However, in the long-term, fundamentals matter. Volkswagen has never had a higher market cap as it did back in October of 2008.
High flying stocks typically mean-revert after having their explosive moves.
If you’re trading these hot stocks, you have to be active and continuously track them. Day traders often will scalp them to try and turn in a quick profit. However, the most money is made by those brave enough to hold on for more substantial gains. Of course, you’ll need to be able to deal with the volatile price swings.
The hottest stocks to buy now are usually accompanied by a juicy story. However, after a massive run-up expect the stock to cool off.
Compelling stories have spill-over effects. For example, Canopy Growth’s catalyst was able to get investors buying sympathy plays like Tilray and Cronos Group.
Now, you can use the price action as an indication of how powerful the catalyst is. In addition to price strength, tracking the trading volume is extremely important. Ideally, you want to see a hot stock trading at least more than three times its average daily volume. It shows that there is a great deal of interest in the name.
Also, pay attention to supply and demand dynamics of a stock. Companies like Tilray and Volkswagen saw massive runups because of a short-squeeze. Having information like short-interest, floating shares, and other fundamental data can prove to be very helpful.
Lastly, if you’re going to trade a hot stock… make sure to have a plan.